Top 10 at 10: Irish bank debacle worsens; Aussie housing nerves grow; Leaky Caketin; Dilbert; Tragic python accident

Here are my Top 10 links from around the Internet at 10 to 11. I welcome your additions and comments below or please send suggestions for Wednesday’s Top 10 at 10 to bernard.hickey@interest.co.nz We are optimistic about our reboots. 1. Bubble, Bubble, Toil and Trouble - Reserve Bank of Australia Governor Glenn Stevens took the unusual step yesterday of giving an interview on Australian breakfast television in which he warned that interest rates are likely to rise and that house prices in Australia were too high. He made the point that he was worried his kids might not be able to afford housing. He has hit the nail on the head. This is an issue of intergenerational wealth transfer. The Australians finally seem to be getting it. Here's the Bloomberg report. Stevens spoke to Channel7's Sunrise programme, which is a bit like Alan Bollard giving an interview to Paul Henry. It showed Stevens really wanted to get the word out to the public and to explain ahead of time why he's raising interest rates and why they should avoid taking on more debt. Although to be fair to Sunrise, interviewer David Koch is a very experienced financial journalist as well as a breakfast television presenter. There's hope for us all! Here's the actual interview. There's a 30 second ad before it so hang in there.

2. The debate has started - This piece from Adele Ferguson in The Age shows the debate about the property bubble in Australia has started, although many believe the 'problem' is caused by too much Chinese buying rather than anything more fundamental. Most investors also believe the Federal Government will bail them out again if things are looking hairy. There is a big moral hazard problem there, which Glenn Stevens seem to be doing his best to address. Do we have a similar moral hazard problem here?

HT Rob via email.

Despite 71 per cent of investors hypothetically believing there could be a property crash, the more common attitude is that other factors will keep the momentum going. They rank the following factors in order of importance: housing shortages; low interest rates; foreign purchases of Australian property; speculative fervour; negative gearing and moral hazard. The survey revealed, however, that moral hazard may be much larger than investors themselves admit, with 42 per cent expecting the Rudd Government to introduce another round of first home buyer grants if the current boom shows signs of ending.

3. March to Mt Kosciuszko - Australian economist Steve Keen is turning his bet-losing walk to Mt Kosciuszko into a march to draw attention to the size of the housing bubble in Australia. It seems like he'll have plenty of company (and media attention) on the walk. Good on him.

Though The Walk will have a political protest at its core, it is not party partisan: our call here is “A Plague on Both Your Houses”. Whatever else might change if Tony replaces Kevin, one thing that won’t change is a sky-high house price policy, since both sides of politics in Canberra (not to mention the commercial Banks and their economists) have become convinced that the major reason the GFC occurred was that house prices fell. This is true in the same sense that jumping off a cliff is painless—it’s hitting the ground at its bottom that hurts. The real cause of the GFC wasn’t falling house prices per se, but the mortgage debt that drove them higher as households took part in a speculative bubble. The rising debt level was, in effect, climbing the mountain in the first place: deleveraging was jumping off it.

Here's one of his scarier charts on the Australian situation. And of course, we know that where Australia goes we will follow.

The rise against GDP is far more dramatic than against household disposable income because other government policies—the stimulus package itself and the RBA’s 4% cut in interest rates—boosted disposable income dramatically last year (but even so, mortgage debt is now a higher proportion of household disposable income than before the GFC). The Boost-inspired house price bubble was financed by households adding another 6% of GDP to their already unprecedented debt burden, when prior to The Boost they were on track to reduce mortgage debt by about 3% of GDP in 2009. We’ve avoided hitting the ground of deleveraging by climbing to a higher cliff.

4. Leaky caketin - The leaky building problem is not just an Auckland thing, it seems. Westpac Stadium has a leaky roof and rusty cladding that will take NZ$5 million to fix, the Dominion Post reports. HT Troy via email.

Stadium chief executive David Gray said the roof was a major problem, with leaks around the stadium, including some over the seating areas. "It does piss people off if they get leaked on." Other internal leaks were causing water damage, he said. Cladding problems included rust, and the wrong screws being used. "There are a number of issues around design and construction," Mr Gray said. The problems were first noticed about four years after the stadium was built, and negotiations over who would foot the bill had been continuing with contractors for about five years. The main contractor, Fletcher Construction, could not be reached for comment yesterday.

5. 'This will not end well' - Wolfgang Munchau at FT.com has cut through all the smoke and mirrors around the Greek rescue deal late last week and found not much has changed. The Germans still said 'Nein!' The Greeks are still stuffed. The euro is still wobbly. The cartoon below captures the feeling well. The Germans don't trust the Greeks, even though they holiday there a lot. The Greeks never ask for receipts because no one pays the taxes. The Germans know and fear this.

The agreement, and the way it was struck, raises plenty of questions about the governance of the eurozone, and the readiness of its political leadership to support it in the long run. As the French economist Agnès Bénassy-Quéré has noted: the combination of no bail-out, no default and no debt monetisation is logically inconsistent. Hence a conditional resolution system is needed. A package of loans at market rates, in which 16 prime ministers or heads of state have a veto, is not going to resolve this fundamental conflict. The Greeks had better make sure they do not get cut off a week before the next German state elections. The EU did not strike this particular deal because anybody believed it would constitute an ideal crisis resolution mechanism, but because it was an expedient compromise between two conflicting positions. In the meantime, we are still asking the same uncomfortable questions as we did last week. Is the Greek austerity plan realistic? Will Greece be able to pull through? What happens if Portugal gets into difficulty? What about Spain? What about Italy? Is there an agenda to deal with current account imbalances? Will Germany ever accept any responsibility for the cohesion of the eurozone, other than expecting others to converge with Germany? All the questions are still out there, unanswered.

6. Irish banking debacle - Share prices in Irish bank stocks collapsed late on Friday as news dribbled out of crisis talks between the Irish government and the major banks over the weekend. It seems the Irish government will announce it will have to virtually nationalise the biggest ones after massive losses on property loans. Here's Emmet Oliver from the Irish Independent.

FINANCE Minister Brian Lenihan is going to seize control of the country's biggest bank -- and tell its top executives to leave if they cannot work under the new regime. His uncompromising stance will kick off a momentous week for Irish banking and the economy, after AIB spent the weekend fighting the Government's plan to take control. In an address to the Dail on the banking crisis, Mr Lenihan will reveal that taxpayers may have to pump as much as €16bn into the banks -- among them Anglo Irish -- to keep them afloat. That is in addition to the €11bn already spent on propping up the two main banks -- AIB and Bank of Ireland -- and Anglo Irish Bank last year. The Regulator is forcing the banks to hold higher capital buffers because he believes mortgage losses are going to escalate, posing a fresh challenge for bank balance sheets.

This is the core of the issue for banks globally. They need more capital to reduce their leverage. It's all about the power of de-leveraging needed to deal with the bursting of debt-fueled housing bubbles in developed countries globally. 7. Watch Basle - Felix Salmon at Reuters highlights the action going on behind the scenes at Basle to force banks to hold more stable funding sources and to hold more capital in general. This is the mechanism for de-leveraging globally. Salmon cites a Bloomberg report that the gnomes in Basle are planning a 100% 'net stable funding ratio' "meaning they would need an amount of longer-term loans or deposits equal to their financing needs for 12 months, including off-balance-sheet commitments and anticipated securitizations." That sounds tougher than the 65% core funding ratio target that the Reserve Bank of New Zealand has set in its liquidity guidelines. That is set to rise to 75% in the next couple of years and is cited by the banks at least (though not by the RBNZ) as a factor keeping funding costs (and therefore term deposit rates and fixed mortgage rates) around 100 basis points higher than before the crisis. I suspect apples can't be compared with pears here, but the general message is the same: regulators are toughening up leverage and liquidity ratios in a way that will hike retail interest rates for a long time to come. It's all about de-leveraging. It will happen by hook or by crook.

These are the rules which we should really be caring about. They’re hammered out slowly, behind closed doors, by mid-level central bankers you’ve almost certainly never heard of. They’re people like Nigel Jenkinson and Marc Saidenberg, the co-chairs of the Working Group on Liquidity, or Hirotaka Hideshima and Richard Thorpe, the co-chairs of the Definition of Capital Subgroup. The Basel rules are important, and they take a long time to coalesce into something acceptable to all the main players — especially the US, whose abundance of small banks makes it wary of rules which are generally designed for much bigger institutions. It’s entirely foreseeable that the Basel committee’s self-imposed 2012 deadline is going to come and go. But if and when the rules go into effect, they’re going to have much more force than anything coming out of Congress or Treasury. So keep an eye on them: if they get diluted significantly from their present form, that’s a bad sign.

8. 13 bankers - A new book by James Kwak and Simon Johnson from Baseline Scenario is about to be published. It's called "13 bankers - The Wall St Takeover and the next Financial Meltdown." It looks to be a cracker and is getting good reviews. Here's a taste at NPR. Essentially, it's all about 'Too Big to Fail' banks and how Barack Obama chose to do a deal with these devils in a meeting with 13 bankers on March 27, 2009. Obama promised change but did nothing.

We chose this meeting because it aptly symbolizes the solidarity between the new Obama administration and the major banks at the depths of the financial crisis and recession. Speaking with reporters after the meeting, White House press secretary Robert Gibbs said, “We’re all in this together,” a phrase repeated by multiple bank CEOs. This contrasted with the new Franklin Delano Roosevelt administration of 1933, which largely froze out the bankers, much to their chagrin. This is also the meeting at which Obama said, “My administration is the only thing between you and the pitchforks.” This was the point at which the government had to decide if it would defend the financial oligarchy from populist outrage, or whether it would reform the financial system that brought us the financial crisis and severe recession. We do not think it was an easy choice. But ultimately Obama and his advisers chose to bet on the bankers they knew. The result has been even larger banks and an even more concentrated financial sector.

9. A real privilege - European Central Bank Economist Maurizio Michael Habib has written a piece at VoxEU examining the 'exorbitant privelege' US residents get by paying low interest rates at home and getting higher rates from money they invest overseas. He says it's not justified. That reserve currency thing seems to be a license for the Americans to print money...literally.

Over the past decades the US has managed to produce positive return differentials on net foreign assets. It is not simply the average level of this differential that is extraordinary, but also the ability of the US to achieve it in a consistent manner through time, from both investment income and capital gains. Other major issuers of international currencies, such as Japan, Switzerland and the Eurozone, have failed to produce a similar performance, due to capital losses. Only when focusing on the yield differential from investment income do Japan and Switzerland come close to matching the US. The Eurozone, on the other hand, does not enjoy any yield privilege similar to other issuers of international currencies – although the negative yield differential between foreign assets and liabilities of Eurozone countries was significantly eroded in the run-up to EMU accession. Contrary to popular belief, my analysis shows that the asymmetry in risk between foreign assets and liabilities does not explain the exorbitant privilege of the US. The transformation of risk may not be called upon to justify excess returns.

10. Totally irrelevant video - This is what happens when you have a 20 foot python lying around...near the toddler. "You never think having a 20 foot python would bring anything but joy..." Many thanks to The Onion for finding this moving story. Boy’s Tragic Death Could Have Happened To Any Family With 20-Foot Pet Python